#34: The Rule of Law – Simplifying System Change
The Rule of Law greatly simplifies the complex system change challenge. As defined in the Global System Change (GSC) framework, the rule of law means: companies should be free to do what they want, provided they do not hurt anyone. The GSC framework guides the most advanced System Change Investing (SCI) strategies. This post summarizes the rule of law and how it is used in SCI.
Flawed Systems – the Root Cause of SDG Problems
Reductionistic thinking produced flawed economic and political systems that do not adequately address negative impacts and other relevant factors. As a result, they produce unintended consequences, such as widespread environmental and social degradation. These myopic systems put business in conflict with society and humanity in conflict with nature. They unintentionally compel companies to harm the environment and society. They are the root causes of SDG problems.
Very generally speaking, under current systems, companies can profitably mitigate about 20 percent of total negative impacts (i.e. short-term, long-term, tangible, intangible, environmental, social). Beyond this point, costs usually increase. If companies continue voluntary mitigation, they ultimately will put themselves out of business.
These unintentionally destructive systems inevitably will change through voluntary or involuntary means. Rapidly growing problems strongly indicate that they already have begun to change. If we do not voluntarily change them quickly, they will involuntarily change in a highly disruptive manner. The corporate and financial sectors are far better off driving voluntary system change, rather than suffering the consequences of involuntary change.
There are many system flaws that compel companies to cause harm. They include externalities, time value of money, limited liability, overemphasizing economic growth, underemphasizing social well-being, and allowing regulated entities to influence regulators. As discussed below, the rule of law provides an easy way to simplify, combine and explain these flaws.
The Global System Change Framework
The three-part GSC framework provides a whole system, nature-based structure for guiding the evolution of human systems and society. The first part uses the laws of nature to define sustainable society at a high level. Once this is clear, the systemic changes and actions needed to get from here to there can be identified.
Part Two of the GSC framework identifies necessary systemic changes. The rule of law is a critical component of GSC Part Two. Part Three shows the actions required in all areas of society to bring about these changes. Taken together, the framework provides a whole system, objective reality vision of sustainable society and the means to achieve it. This framework can be used to develop and guide responsible investing, corporate sustainability, and society-level system change strategies.
The Rule of Law
The rule of law is an ideal way to frame up economic and political reform. As noted above, there are many system flaws that compel companies to cause harm. They could be rolled up into one, overarching meta system flaw – the failure to hold companies fully responsible for negative impacts. This is the general mechanism that makes it impossible for companies to stop harming the environment and society.
The meta system change solution is to hold companies fully responsible for the harm they impose on society. This is what rule of law means under the GSC framework. When this occurs, acting in a fully responsible manner becomes the profit-maximizing strategy.
The current corporate responsibility framework is based on voluntary responsibility. Rather than holding companies fully responsible, we allow them to extensively harm the environment and society, and then encourage them to voluntarily stop harm.
As shown by rapidly growing environmental and social problems, it is impossible for this system to work. Beyond a certain point, voluntary corporate responsibility equals voluntary corporate suicide. We must hold companies to the same standard as individuals – act responsibly or be held accountable for harm. Corporate responsibility must be made mandatory. Voluntary corporate responsibility is ineffective, unsustainable and ultimately suicidal.
The rule of law is an ideal system change framing device because it is objective and not debatable within the realm of logic. It transcends philosophies, biases and vested interest deceptions. Companies cannot logically argue that they should be allowed to profit by degrading the environment and society.
The rule of law boils system change down to one simple meta solution. It can guide specific system changes, such as reforming externalities, time value of money and limited liability. We will know that these and other systems are reformed and sustainable when they hold companies fully responsible.
SCI and the Rule of Law
The GSC framework provides an objective reality standard for rating corporate system change performance. Clarifying overall system change makes it possible to identify the optimal corporate system change strategies. Aspects of this become metrics in SCI rating models. Without this standard, analysts would be unable to assess whether companies were engaging in system change greenwashing.
The rule of law (i.e. hold companies fully responsible for harm) is an important metric category in advanced SCI models. One aspect of assessment is determining if companies are influencing government to hold them more or less responsible. Other aspects assess the degree to which companies are promoting specific systemic changes that hold them more responsible.
The GSC Rule of Law concept is easy to understand. But implementing it will be highly complex. Vested interests often will resist being held responsible for harm. Internalizing costs could reduce profits and investment returns.
Making the business case for system change is a critical component of SCI. This involves helping the corporate and financial sectors to understand that profiting by degrading the environment and society (i.e. that which enables the economy and business to exist) is not sustainable. As noted above, companies are far better off driving voluntary system change before involuntary change occurs.
This work no longer can be delayed. We have entered a phase of rapid system change. With their power, influence and resources, the corporate and financial sectors have the ability to drive collaborative system change. It’s largely up to them whether we face voluntary or involuntary change. SCI strongly encourages voluntary system change by making it practical and profitable.
A main purpose of SCI is to incentivize companies to collaborate on rule of law and other necessary systemic changes. More sophisticated companies understand that they are far better off driving voluntary system change. These intelligent companies will do many things well, and thereby earn higher returns. This and several other factors enable SCI funds to provide superior financial and sustainability performance.
For more information about SCI and the GSC framework, visit our website SystemChangeInvesting.com or contact us at info@SystemChangeInvesting.com
